And, because the circumstances go from one extreme to the other, John and Mary's equity is worth either $125k or $25k, or somewhere in between
I thought I’d go through the Northwest Justice Project’s Foreclosure White Paper and provide a critical analysis.
Except that, it never occurred to me I’d get stuck on the very first page.
Oh well, it’s time someone who knows a thing or two about foreclosures steps up and takes a long, hard look at it because it’s got its share of problems, beginning with page 1, paragraph 1.
The first key to understanding Foreclosure Rescue Scams is the concept of “home equity.” Home equity is simply the difference between the market value of a home and the sum total of liabilities (i.e. debt) on the property. For instance, a home that is worth $250,000, but is subject to a $100,000 mortgage, will have $150,000 of home equity (assuming there are no other liens or debts against the property). — The Foreclosure White Paper
Page 1, Paragraph 1
Well, at least its author, attorney Eric Dunn, by attempting to explain the concept of equity (though why he calls it “home equity,” I don’t know), understands it exists. That’s a significant improvement over what we’ve previously seen from your office.
Except that, Eric, it turns out, has it all wrong.
What Eric is describing is the concept of equity in a perfect world, on a perfect day, in a vacuum. And, if that’s the sort of equity we’re talking about, then Eric’s explanation is certainly fine.
However . . . the white paper is addressing the issue of properties in foreclosure.
In doing so, he cannot honestly talk about the concept of equity without mentioning the very real effect of foreclosure on equity. To do so is, to use Eric’s word (or was it Ignacia’s?), is disingenuous.
It’s a perfect day, in a perfect world, and John and Mary owe $100k on their $250k house, per Eric’s example above. Not only that, it’s a sellers’ market where properties are fetching top dollar (sweet!).
How much equity do John and Mary have?
Although Eric would argue $150k, that’s a bit of a stretch, but close enough, I guess.
And if John and Mary decide they want to cash out by selling, what can they expect to walk away with?
Closing costs in my area are 10% or so to the seller. With a full price offer, John and Mary walk out of closing with a check for $125k. Again, close enough.
It’s a less than perfect day, in a less than perfect world. John and Mary still owe $100k on their $250k house, but the market has shifted. Now, homes aren’t selling nearly as fast as they used to, and full price offers are few and far between.
Even worse, property values are beginning to tumble.
How much equity do John and Mary have today?
Not $150k, and not $125k.
More than likely, if they want to sell, they’ll have to take a discount. And if they really want to sell, like anytime soon, they’ll probably have to take a considerable discount to guarantee offers comes in.
So, when their agent calls after months of inactivity and says they’ll need to come down to $235k, they agree instantly. And a month later, when no offers have come in and the market continues to weaken, they reduce it once more, this time to $220k, crossing their fingers all the while.
Thankfully, that does the trick because a couple offers finally show up and John and Mary accept the better of the two, $210k. It’s less than what they’d hoped for, but they’re glad just the same.
How much do they net at closing?
The same 10% closing costs are in effect, so they’re already down to just $89k.
Only this time around, the buyer also asked for a 3% contribution from the seller, to be used toward the buyer’s closing costs. And, though John and Mary didn’t want to take an additional 3% discount, they were sufficiently motivated to do so.
That’s another $6,300, and now we’re down to $82,400, which turns out to be the amount of their settlement check.
They took a big hit, but at least it’s over and they can move on, which was their goal all along.
It’s a terrible day, and John and Mary’s home is scheduled to be foreclosed in just a couple days. They owe the same $100k, including all the back payments and foreclosure fees, and their house is said to be worth $250k, but no one can really say for sure.
A ton of equity?
Well, not really.
They risk losing everything at the foreclosure auction and are looking at offers from local investors. The last few days have been crazy with no less than four guys knocking on their door and making offers to buy their home.
One offered “U-Haul money,” $2,500, to walk away. John told him to get lost and threw him off the porch.
Another said he’d go $30k if John had a title report showing he and Mary actually owned the place and there were no other liens against it. Unfortunately, John hadn’t thought to order a title report because he assumed he’d be able to come up with the money to stop foreclosure on his own. With no title report, the guy said, “thanks, but no thanks, I’ll just buy it at the sale for what you owe.”
One investor said he’d buy it for what they owe, too, only he’d allow them to stay and rent it, giving them an option to buy it back within 3 years. But John was too smart for that. He’d read all about foreclosure rescue scams and didn’t want to be screwed out of his equity.
The last offer was from a guy who worked for Bobo, the world’s only real estate buying chimp. He’d pay $25k, in cash, and give them 10 days to vacate. He’d give them $5k upon signing over the property, and the balance once they were gone, with a $250 a day penalty for every day they were still in the property beyond 10.
He also suggested they might do better by letting the property go to the foreclosure sale and hope a bidding war ensues, but they decided that was far too risky and didn’t want to ruin their credit, so they rejected that route.
And so, with fewer options than they’d have preferred, they took the chimp’s offer of $25k, the best of the bunch (no pun intended).
Three situations, all influenced by circumstance, resulting in vastly different values.
And, because the circumstances go from one extreme to the other, John and Mary’s equity is worth either $125k or $25k, or somewhere in between.
What it’s not is . . .
. . . simply the difference between the market value of a home and the sum total of liabilities . . .
Can you imagine, Rob, what consumer advocate attorneys will say when they learn John and Mary were paid $25k for the $150k equity?
I’m guessing, “scam!”
When, in fact, John and Mary weighed their options and, in light of their circumstances, accepted what they considered the best offer available.
Was $25k a really bad offer, and were they somehow ripped off or tricked out of their hard-earned equity?
On a perfect day, in a perfect world, in a vaccum, probably yes.
But on a terrible day, with foreclosure looming, absolutely not.
That $25k represents a lot more than some people not about to lose their homes imagine. With foreclosure just around the corner, $25k is nothing less than salvation.
It’s a guarantee foreclosure never happens, nor does eviction. It means money to move, to pay first and last rent, to make deposits for phones and utilities, and to be able to start all over without a lot of pain and suffering.
It means no attorneys, lawsuits, process servers or life-long foreclosure scars.
It means no more worrying about how things turn out. That $25k in hand is almost priceless and because of it, they’re certain to come out okay.
No, it’s not the perfect solution (see perfect day, perfect world, above, for perfect solution), but it’s not disaster either, and at the moment, avoiding a total disaster is Job #1. $25k does exactly that.
And frankly, Rob, unless and until the Office of the Washington State Attorney General can guarantee they’ll net more than $25k at the foreclosure auction (it can’t), it’s indisputably fair.
Equity in a vacuum, as described in the Foreclosure White Paper, never happens except on shows like “Flip This House,” or whenever consumer protection attorneys want to scream “my client is a victim.”
More likely, that client of theirs received 100% of what was reasonable at the time, considering the circumstances.
Attorney Eric Dunn, as the ample-breasted latina Ignacia Rameriz, once commented, “If you just pay John & Mary a fair price for the house with no strings attached, then you have nothing to worry about.”
I know you probably hate this idea, Rob, but I suggest we let John and Mary decide.
They determined fair to be $25k (though Eric, no doubt, would argue otherwise). And no, they’re not poor, sick, elderly, delusional, depressed or any of those other things you like to claim.
What they are, Rob, is hours away from losing their home.
You see, it’s circumstances that determine equity and what it’s worth in terms of real dollars, not simply market value less debt. And circumstances like, I don’t know, FORECLOSURE, must be factored into the equity equation.
You folks never seem to remember that. Instead, you talk about equity as if foreclosure wasn’t just hours away from stripping it all, and that’s a lie of omission if there ever was one.
The first key to understanding Foreclosure Rescue Scams is the concept of “home equity.” — Attorney Eric Dunn
I really don’t think Eric understands foreclosure rescue scams.
In the arena,
P. S. I just looked at page 1, paragraph 2. It’s going to be a very long night. Thanks for nothing, Ignacia!